Daily Newsletter, Tuesday, 11/10/2009

Table of Contents

Market Wrap

Consolidation Day

by Jim Brown

After Monday's big short squeeze the markets wandered aimlessly as traders consolidated recent gains. Considering the +475 point gain in the Dow over the last week this was a needed rest.

Market Stats Table

The market had little in the way of news to digest today with the economic calendar anemic and earnings news dwindling. On the economic front the National Association of Realtors reported home prices for Q3 and there was considerable improvement. Prices improved to only an -11.2% decline over the last twelve months compared to the -15.7% decline in Q2. There was still some weakness with only 30 of the 153 metro areas surveyed reporting gains in prices. This is only slightly better than the 26 areas with improvements in Q2. Of the top ten metro areas Denver +1.7% and Houston +0.1% were the only two areas actually showing higher prices than Q3-2008. Las Vegas -34.5% and Miami -24.5% were the two areas with the largest continued declines. Prices are rebounding sharply in a few markets like Cumberland MD where prices are 19% over the Q2 prices. The extension of the homebuyer tax credit and the addition of a move up buyer credit should continue to push prices higher.

The other report today was the Job Openings and Labor Turnovers Survey or JOLTS. This report is mostly ignored because it is a lagging report and secondary to the ADP and Non-Farm Payrolls. However, the report did show job openings increased slightly in September despite a drop in employment. This report showed that 4 million workers found new jobs but 4.3 million left their jobs. There were 3.8 million unfilled jobs in September.

JOLTS Chart

This was a boring day to watch with the Dow trading in slightly more than a 50-point range all day. The only movement was directly related to the moves in the dollar. This is really getting to be a nuisance and unfortunately I don't see it changing any time soon.

Dollar Index Compared to Dow

Investors are very nervous about their current positions and the short interest is still high. Take Priceline for instance. Priceline reported strong earnings and the travel agent said summer bookings were "exceptionally strong." They raised their guidance for the full year by an average of +8 cents over what analysts were expecting. So what would you expect for a $175 stock on a less than a dime increase in guidance? Try a gain of +$30 to $204 on the news. It was not as if the news was unexpected. Expedia (EXPE) reported a jump in profits and raised guidance just a couple weeks ago. The problem is the shorts. Since the shorts have been unsuccessful in shorting the market they are piling up on momentum stocks like PCLN and AMZN. This results in extremely big short squeezes when news breaks.

Priceline Chart

Sometimes the short position works as with MBIA this week. MBIA shares fell -26% on Tuesday after they reported a loss of $3.50 per share, which included an $810 million loss on insured credit derivatives. MBIA is struggling to write new business to offset its portfolio of losses because it's credit rating was cut to junk and it can no longer attract new customers.

Ambac, (ABK) a competitor of MBIA lost -33% on Tuesday after warning that it may file for bankruptcy protection and that regulators could launch proceedings at any time in order to protect policy holders. Ambac said it should have enough liquidity to make it until Q2-2011 but long term the outlook was grim. ABK closed at 79-cents after losing more than $90 in stock price over the last 24-months. You can bet even the faithful hard core employees are dusting off their resumes.

Ambac Chart

MBIA Chart

All the financials had a tough day after Senator Dodd announced a bold plan to reform financial regulation that is even stronger than anything previously proposed. The 1,136 page bill calls for creating three new government agencies regulating derivatives, hedge funds, credit rating agencies and executive pay. They have been talking about a too big to fail plan for banks but I would bet this plan is too big to pass in one monster bill. There are simply too many sacred cows being taken to the slaughterhouse in Dodd's bill.

The bill would create an agency called the Financial Institutions Regulatory Administration and would abolish the Office of Thrift Supervision and the Comptroller of the Currency. The FIRA would also strip all regulatory powers from the Federal Reserve and the FDIC. The plan would also create a National Insurance Office to regulate insurance companies. That is currently handled by the individual states. Needless to say the plan did not meet with much support in the financial community. Any time you try to rock the regulatory boat there will be so much indecision about the final outcome that investors in bank stocks may decide to find somewhere else to park their money. Fortunately the sheer size of the bill and the number of critical changes will doom it to various committees for months to come.

Banks lost ground today on a knee jerk reaction to the news but since the bill won't get a final vote until probably the second quarter of 2010 the weakness is probably temporary. After Monday's rally the banks needed to rest even without the announcement of the proposed changes.

Chart of the XLF

News Corp billionaire Rupert Murdoch is taking aim at free content on the web and said companies like Google were "content kleptomaniacs" and were driving newspapers out of business by providing the content for free. He said Google "steals their stories" and uses them to generate ad revenue for themselves. Google immediately responded that they could eliminate the Wall Street Journal articles from the search engine. However, they said the WSJ gets 25% of its readership from Google searches. If Google did not index their articles a web search for the topic would not display any WSJ links. It would be as if the WSJ ceased to exist for the general public. Very, very few people actually go to the WSJ to search for news. If Murdoch has his way and all the WSJ articles are pay per view then far fewer people will go to WSJ.com for news. Why go when Google and Yahoo offer a ready index of dozens of other content providers with the same news for free. One analyst said that would be a major step for Murdoch and one that would take him right off a very large cliff.

News Corp Chart

For me the most positive event for the day was an announcement by FedEx that package traffic would be up about 8% in Q4 and it expects to ship 13 million packages on Dec-14th. That will be the busiest day ever for FedEx. In 2008 FedEx shipped about 12 million packages on that day. That was up from 11.5 million in 2007. FedEx ships about 7.5 million packages on an average day. Mike Glenn, VP of market development, said the estimate was based on retail sales growth projections and projections from their largest customers. FedEx said it would hire 14,000 additional part time workers during Nov/Dec. Competitor UPS said it would hire 50,000 seasonal workers this year compared to the 60,000 it hired in 2007. UPS did not release statistics for 2008. December 14th is projected to be the busiest shipping day, Dec 17th the last day to ship ground and Dec 23rd the last day to ship overnight for Christmas delivery.

FedEx Chart

UPS Chart

It is Christmas in November for Activision (ATVI). Activision released its much awaited sequel to Call of Duty, named Modern Warfare 2, today and the simultaneous launch at over 10,000 stores should mean over one million copies will be sold today. My 28 yr old son in law waited in line at midnight Monday night to get a copy. He said they had pallets of Xbox 360 game consoles and games and they expected to sell out by tonight. Call of Duty 2 is expected to sell 13 million copies by year-end. At the $59 list price that is a serious cash infusion. ATVI actually closed down fractionally despite the hype. Buy the rumor, sell the news.

Hurricane Ida is history and has fallen back into a disorganized band of showers after zipping through the gulf last weekend. Ida did not cause any real damage because it is too far into the fall and the water temperatures would not support a full-fledged storm. However, the Minerals Management Service reported this afternoon that 43% of oil production from the Gulf had been shut in as a precaution. 28% of gas production was also offline. All of that production should be back in operation by next week.

Crude prices were crushed at the open with a drop from $80.50 to $77.89 when Ida failed to cause any damage and the dollar rebounded from overnight lows. The dollar index found resistance at 75.20 intraday and is trading at $74.94 as I type this commentary. That suggests tomorrow will see a rebound in crude prices as a dollar hedge.

Crude Oil Chart

It would be tough to make any kind of market call based on today's market action. With the +475 point rally in the Dow over the last five days and the volatility in the dollar pushing equity prices higher the fundamentals have little impact. Monday was a dollar denominated short squeeze when the dollar index fell over 1% in overnight trading. Today was simply a consolidation day ahead of the Veterans Day holiday on Wednesday. The equity markets will remain open but banks and the bond market will be closed in the USA.

You may remember I mentioned over the weekend that Dow 10100 was important but it was not the number controlling the markets. That number is S&P 1100. The Dow rallied this week from Friday's close of 10,023 to today's close of 10,245 and yet the rest of the indexes were mixed today. The Dow has hyper extended thanks to the cash flowing into blue chips while the S&P has failed to even reach the October highs. The Dow is only 100 points away from strong resistance at 10350 and I believe we will see that test this week. Support for the Dow today was 10200.

Dow Chart

The S&P broke through the long-term downtrend resistance from October 2007 and then used that resistance as support on Tuesday's decline. This is a very bullish breakout in view of how strongly it repulsed the S&P back in October. The S&P has one last test at 1100 and that is the one the market will be watching. If the S&P can break over 1100 this week I believe the stage is set for a test of 1140-1150. You have probably heard numerous analysts claim that 1150 is their year-end target for the S&P. We will have to wait to see if the S&P rolls over and dies when that number is reached or proves them all wrong with a move to higher levels.

S&P-500 Chart

The Nasdaq composite finished slightly negative but the Nasdaq 100 closed with a decent gain. That is money flowing into big cap techs rather than the average tech stock. The composite has strong resistance at 2180 and closed today at 2150. The Nasdaq composite needs to move over 2180 to avoid the potential for a H&S in the index. I believe it will be successful because the Nasdaq 100 is only a couple ticks short of a breakout over resistance at 1775. A breakout by the big cap techs should have the Nasdaq soldiers falling in line and saluting. Support on the composite is 2140 and the NDX is 1765 after today's intraday dip.

Nasdaq Composite Chart

Nasdaq 100 Chart

This is where the analysis becomes painful. I believe the Nasdaq will breakout and I believe the S&P will overcome 1100 but the small caps have suddenly ceased to perform. The out performance by the blue chips in the Dow and the Nasdaq big caps coupled with the sudden slowing of the Russell suggests fund managers have suddenly begun to shift money back into the higher liquidity blue chips as though they were expecting some market weakness ahead. This is a cause for concern for me. I turned bullish last Tuesday when the Russell outperformed the other indexes and completed a successful test of support at 550. In theory the Russell should be at least back to resistance at 623 that corresponds to S&P 1100 and Nasdaq 2160. It should definitely not be lagging to the extent we see today.

This causes me to be cautious about the overall market until we do cross all those thresholds I mentioned above and the Russell wakes up from its slumber. If we were to see the Russell begin to roll over I would immediately turn bearish again. Initial support is 580.

Russell Chart

Since Wednesday is a partial holiday with the bond market and banks closed I didn't expect any major moves. However, if the dollar continues to fall further below 75 on the Dollar Index overnight I would expect a low volume rally on Wednesday. We have seen several of these dollar driven rallies recently and with volume likely to be the lowest in months it could be powerful. Volume on Tuesday was the second lowest since Oct-7th at 7.7 billion shares. Obviously it was pre-holiday but tomorrow should be significantly worse. Be prepared!

Jim Brown

New Plays

Lodging & Leisure

by James Brown

Why We Like It:
Shares of this hotel operator have been consistently stair stepping higher. The stock closed at new 2009 highs today after traders bought the dip near $18.00. The move looks like a bullish entry point. I'm suggesting bullish positions now with a stop under the 50-dma. The $20.00 level could offer some round-number resistance but I'm setting our first target at $21.00. FYI: The point & figure chart is bullish with a $27 target. Our time frame is several weeks.

Why We Like It:
ATVI has some of the hottest products on the market with their Guitar Hero, World of Warcraft, and Call of Duty franchises. The company just released Call of Duty, Modern Warfare 2 at its midnight launch last night. Sales of their new CoD product are expected to rival the latest Grand Theft Auto product. Yet the stock is struggling. Shares failed several times at the $13.00 level. In late October the sell-off broke significant support. Now this November oversold bounce is beginning to falter.

Today's action in ATVI has produced a bearish reversal pattern. I want to see some confirmation first. The plan is to use a trigger at $11.20 (under the 200-dma) to open bearish positions. We'll use a stop above today's high. Our first target is $10.10. Our second target is $9.25. Our time frame is several weeks.

Annotated chart:

Entry on November xx at $xx.xx

In Play Updates and Reviews

Retailers Hit New 2009 highs

by James Brown

BBY continues to rally and shares broke through resistance at $42.00. The stock also hit our trigger to open bullish positions at $42.20.
Our first target is $46.00. Our second target is $49.80. Our time frame is several weeks.

chart:

Entry on November 10 at $42.20
Change since picked: + 0.04
Earnings Date 12/15/09 (unconfirmed)
Average Daily Volume: 5.1 million
Listed on November 09, 2009

Baker Hughes Inc. - BHI - close: 42.50 change: +0.56 stop: 40.49

Energy stocks were mixed thanks to some volatility in oil futures. Shares of BHI failed to see any follow through on yesterday's bounce, which is worrisome. I'm still suggesting bullish positions here but More conservative traders may want to wait for a close over $44.00 before initiating positions. Our first target is $47.00. Our second target is $49.85.

Entry on November 09 at $43.06
Change since picked: - 0.56
Earnings Date 01/28/10 (unconfirmed)
Average Daily Volume: 5.6 million
Listed on November 09, 2009

Southern Copper Corp. - PCU - close: 34.74 change: +0.10 stop: 30.95

Gold and oil may be moving on the dollar but copper prices have been stuck consolidating sideways. Shares of PCU have been able to rally without copper thus far. The 50-dma has risen to $31.65 and more conservative traders may want to raise their stops.
Our target is $39.50.

I suggested small positions (25% to 50% your normal size).

Entry on November 04 at $33.80
Change since picked: + 0.94
Earnings Date 10/22/09 (confirmed)
Average Daily Volume: 3.5 million
Listed on November 03, 2009

Polaris Industries - PII - close: 46.12 change: -0.29 stop: 41.80

The rally in PII paused with the market. If you're looking for a new entry point I'd wait for a dip near the $45.00-44.75 zone.

Our target to exit is $49.65. I consider this an aggressive play and suggest smaller position sizes.

Shares of TRV are still running away from us. We don't want to chase it. I'm suggesting readers use a trigger to buy the dip at $52.15. If triggered our target is $57.40.

Entry on November xx at $xx.xx

UltraShort Russell - TWM - close: 29.21 change: +0.40 stop: 28.49

We narrowly escaped being stopped out when the TWM bounced from $28.53. If this ETF can close back above $30.00 it could forecast another leg higher. The pattern created in today's session is one of indecision by traders.

I'm not suggesting new positions at this time.
TWM has already hit our first target. We're currently aiming for $34.00.

There is no change from my prior comments. We don't want to chase the rally in YZC. I'll keep our trigger to buy a dip at $16.35 for now but we'll probably end up adjusting it higher.
Our target is $19.95. Our time frame is several weeks.

Entry on November xx at $xx.xx

BEARISH Play Updates

Navistar Intl. - NAV - close: 35.65 change: -0.01 stop: 36.55

If the stock market rally picks up again tomorrow I would expect us to get stopped out of NAV pretty quickly. If reverse happens and the stock trades under $34.00 we can use it as a new entry point for bearish positions.
Our first target is $30.50. Our second target is $27.75.

FYI: We initiated this play with half a position.

Entry on October 24 at $35.41 (buy half a position)
Change since picked: + 0.24
Earnings Date 12/30/09 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on October 24, 2009

Financial SPDRs - XLF - close: 14.77 change: -0.05 stop: 15.21

Lack of follow through on yesterday's rally is a good sign if you're bearish. Unfortunately we're still in jeopardy here. A clearly defined failed rally near $15.00 could be used as a new bearish entry point.
The XLF has potential support at its rising 100-dma and exponential 200-dma. Our target is $13.10.

Entry on October 26 at $14.71 (small positions)
Change since picked: + 0.06
Earnings Date --/--/--
Average Daily Volume: 102 million
Listed on October 26, 2009